6 Direct Deposit Alternatives

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Direct deposit is a payment method that delivers paychecks to employees electronically. Employees provide their checking or savings account information to HR during the new-employee orientation process. Then, every payday, the employer transfers workers’ paychecks into their bank accounts, thus eliminating paper checks and trips to the bank. 

Most employers offer direct deposit, and while direct deposit is a popular, convenient, and practical paycheck option, it’s not suitable for all workers, particularly those without a bank account. 

According to an FDIC survey of unbanked and underbanked households, more than 14 million American adults are unbanked, accounting for around 6% of U.S. households. Communities riddled with income inequality are the most affected: An income level of less than $30,000 is the strongest indicator of a higher-than-average unbanked community.

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When an employee lacks banking options, they may turn to alternative finance methods with unreasonably high interest rates and fees, often leading to a situation where they live from paycheck to paycheck.  

Employers have payroll options that can help nonbanking employees or those who simply prefer other payment forms. Here’s a look at six popular alternatives to direct deposit that may benefit both your staff and your business.

Did you know? According to Paycor, 19 states allow employers to make direct deposit mandatory: Alabama (only in the private sector), Arizona, Indiana, Iowa, Kentucky, Louisiana, Maine, Massachusetts, Michigan, North Carolina, North Dakota, Oklahoma, South Dakota, Tennessee, Texas, Utah, Washington, West Virginia and Wisconsin.

1. ACH transfer

Automated Clearing House (ACH) is a network that began in the 1970s. U.S. banks wanted to improve how money was transferred as the growing number of paper checks became overwhelming. The National Automated Clearing House Association (Nacha) manages and governs the ACH network. 

ACH provides a bank-level encrypted electronic transfer of money between banks. ACH manages the system behind direct deposit and direct payments. Your business, the government or an individual can make payments using this network. 

Not to be confused with a wire transfer or credit card network, ACH is a direct payment between two bank accounts. ACH transfers are grouped by the two banks that completed the transaction. The transactions are all checked and held by the bank before they are sent in bulk.

While most may associate ACH transfers with direct deposits, ACH direct payments is another option. ACH direct payments can be made via ACH credit payments and ACH debit payments. You can use an ACH credit payment to pay family and friends, or any single invoice. An ACH debit payment allows your company to debit money from your business bank account, usually to pay recurring bills – such as utilities and rent.

ACH pros

These are some advantages of making ACH direct payments:

  • Security: ACH direct payments are one of the safest ways to transfer money electronically.
  • Reversal options: An ACH direct payment can be reversed if an error or fraud is detected.
  • Easy setup: With ACH direct, it’s easy to set up recurring payments so that you can avoid late fees.
  • Low transaction fees: ACH direct payments are an affordable payroll management solution with low transaction fees. Additionally, ACH is more stable through banks than payment cards.

ACH cons

These are some disadvantages to making ACH direct payments:

  • Extra time: Transfers aren’t instant and can take up to four days. 
  • Short windows: Transfers must be made during certain hours, or the transaction could be delayed.
  • Few options for international payments: There’s limited international use for ACH direct payments.
  • Limited transactions: Depending on the account, you may face transaction limits. 
  • Additional fees: Some banks still impose rules and fees regarding the transfer limit of six times per month (although the federal government no longer enforces this rule).

Setting up ACH payments

To set up ACH payments, you’ll need to choose a payment processor and sign up for an account. You may find that your current bank has comparable fees, or it may make sense to go with an ACH operator or automated payroll software. 

Once you choose a provider and create an account, you’ll need to complete paperwork for ACH payments. However, once the paperwork has been completed, you can pay vendors and employees on a one-time or recurring basis because the payee’s information is saved.

Next, choose the correct entry classes when processing ACH payments. Your bank or payroll software should be able to do this for you to prevent any mistakes and delays in processing. Finally, always read the ACH payment terms when choosing your preferred financial partner, so you understand the process and fees. 

FYIFYI: If you’re searching for a top online payroll provider, you should consider a number of factors to determine which one is right for you, such as costs and features.

2. Prepaid card, aka payroll card

You may be wondering if your business should use payroll cards. While direct deposit is helpful for employees with a bank account, some employees may prefer a payroll card. Payroll cards work like debit cards. Every payday, the card is loaded with the employee’s earned wages. The employee can use the money to take out cash from an ATM, make purchases, pay bills online, and transfer money to friends and family.

Some payroll cards are seen as a detriment to the employee because of miscellaneous fees. For example, banks may add fees for accessing wages via ATMs, making a purchase, checking an account balance at an ATM, card replacement and transferring funds.

Payroll card pros

Here are some of the best qualities of payroll cards:

  • Environmentally friendly: Payroll cards are considered eco-friendly because there are no paper checks involved. 
  • Inexpensive: Payroll cards are cheaper than paper checks.
  • Fast: Payroll cards are a quick payment method because there’s no need to cash a check. 
  • Secure: Because these prepaid debit cards require an employee PIN, there’s a higher level of security. 

Payroll card cons

These are some potential drawbacks of payroll cards:

  • Fees: Banks may impose fees for using payroll cards, including ATM fees. 
  • Lack of awareness: You may need to educate employees on how to use payment cards.

Setting up payroll cards

If you use payroll software, ask your provider if payroll cards are an option. Some software providers offer payroll cards for free to client companies, while others charge you fees for initial setup, ATM use and inactivity.

To set up payroll cards, first select a provider, which could be your payroll software, bank, credit card company or professional employer organization (PEO). Expect it to take a few days to a few weeks to enroll and set up the payroll card system. Any employees who sign up for the service will be given instructions on how to participate. Cards are mailed after setup is complete.

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FYIFYI: Banking law requires you to provide your employees at least one alternative to payroll debit cards, and an employee can choose not to be paid with payroll debit cards.

3. PayPal

Although PayPal is generally considered a mobile wallet, it offers advanced features – such as invoicing and automation – and may work as a direct deposit alternative. 

Paying contractors or irregular part-time employees can be a hassle if you use paper checks or pay cards. PayPal is a great option when paying freelancers or one-time invoices.

When sending these payments, be sure to check the box for Service. Sending a service payment may incur a fee for the contractor, but this fee gives the recipient an instant payment option. If the freelancer doesn’t agree to this fee, you’ll need to figure out a different payment option. It’s a good idea to make it clear from the outset that you’re paying via PayPal.

TipTip: If you’re making contractor payments via PayPal, you won’t need to report these transactions on a 1099 form at tax time. PayPal is liable for keeping track of these transactions and reporting them to the IRS.

PayPal pros

Here are some benefits of paying workers via PayPal:

  • Recurring payments: PayPal has a convenient recurring payments option.
  • Security: PayPal is a secure payment platform.
  • No merchant account: You don’t need a merchant account to access PayPal.
  • International options: You have the ability to convert currency to make international payments.
  • Mobile app: The PayPal mobile application is a helpful tool for sending payments.
  • Automation: PayPal offers automated payroll so you can choose a specific day and time.

PayPal cons

These are some drawbacks to using PayPal:

  • Limited access to support: PayPal customer service can be difficult to reach.
  • Chargeback fees: Chargebacks can incur hefty fees with PayPal. 
  • Lag time: Once you add an employee to the system, they’ll have to wait 48 hours for their first paycheck.
  • Instant access fee: There’s a 1% fee if an employee wants to access their money instantly.
  • Verification time: It can take a few hours or days to verify a new business bank account or credit card.

Paying contractors with PayPal

These are the two ways to pay contractors via PayPal: 

  1. Request the contractor’s email and send direct payment through your PayPal account. 
  2. Ask the freelancer to email you a PayPal invoice when their work is complete. Next, you’ll receive an email requesting payment. Click the link in the email to log in to your account and complete the money request.

Either way, you can pay the contractor via bank account or credit card, but additional fees may apply.

4. Mobile wallet

According to the Pew Research Center, 85% of Americans now own a smartphone, which is more than double the number from 10 years ago. Since employees can access social media accounts, email, banks, and more on their smartphones, it’s likely quick and convenient to receive their paychecks through a mobile wallet like Venmo or Apple Pay.

Mobile wallet pros

These are some advantages of paying employees via Venmo, Apple Pay or another mobile wallet:  

  • Easy signup: Your employees can sign up quickly for a mobile wallet account using their cell phone number.
  • Multiple uses: Once funds are transferred, your personnel can use the money to purchase items and pay bills.
  • Low fees: If you use your company’s bank account, transfer fees are virtually nonexistent.
  • Security: Mobile wallets are more secure than debit or credit cards.
  • Data: The mobile wallet can store more financial information than a paycheck.

Mobile wallet cons

Here are some disadvantages to paying employees via Venmo, Apple Pay or another mobile wallet:  

  • Extra fees: Users may incur fees when withdrawing money from a mobile wallet.
  • Lack of physical records: If a pay stub is required for taxes or applications in your state, it might be challenging to provide an adequate record from a mobile wallet.

Paying employees with a mobile wallet

To offer a mobile wallet as a payment method, it’s best to partner with payroll software that supports this feature. Payroll software like QuickBooks Payroll, Paychex and Gusto offers mobile app solutions to complete payroll on the go. Read our review of Intuit’s payroll options, our Paychex review and our Gusto review for more in-depth information.

TipTip: If you’re looking for a mobile wallet, check out our mobile wallet guide, which compares Apple Pay, Google Pay and Samsung Pay.

5. Paper check

While paying by a paper check may seem old school, there are still benefits for your small business. For instance, paper checks can help you track payroll quickly if you’re not ready for automated payroll software. 

Plus, smaller companies may benefit from the personal touch a paper check can provide. For example, you can check in with your employees by handing out checks directly, automate the process by having your bank fill out and mail the checks, or write a check on the fly if there’s an accounting error.

Paper check pros

Here are some advantages of using paper checks:

  • Lack of transaction fees: There are no transaction fees for either you or your staff – unless checks are mailed by your bank, which may charge your company for the service.
  • Personal interaction: Handing out paper paychecks can deepen your relationship with employees because you have an opportunity to interact with them in person.
  • Records: Paychecks provide a written payroll record if you’re not quite ready for payroll software.

Paper check cons

Here are some drawbacks of using paper checks:

  • Additional paperwork: All paper check transactions must be reported on a 1099 form for each employee or contractor.
  • Extra costs: Purchasing and using paper checks adds extra costs to your budget. 
  • Time: Additional time is needed for ordering and completing paper checks each pay period.

Paying employees with paper checks

You can order paper checks through your bank and personalize them with your business information. However, it’s advisable to open a dedicated payroll account so no other business expenses that are debited could cause the account to fall below zero.

Fill out paper checks each pay period or have your bank’s bill-pay service mail the checks to your employees. If there are any discrepancies, you’ll have to void the checks and rewrite them.

6. Cash

Paying employees cash for their work may save you fees, but it doesn’t always make sense. For example, even though you save money on payroll software and bank fees, tracking cash is challenging. If you have more than a few employees, having electronic records for their paychecks not only makes bookkeeping easier but can keep your small business from being audited

Cash pros

Here are some advantages of paying employees with cash:

  • Zero costs: There’s no cost to transfer money from your business to your employee.
  • No fees: Cash incurs no bank fees, usage fees or other fees.  
  • Instant transfer: When you hand off cash, there’s an instant transfer of money to employees. With cash, your employees can immediately make purchases and pay bills.

Cash cons

Here are some disadvantages of paying employees with cash:

  • No paper trail: Your bookkeeping won’t have precise records. 
  • IRS audit: Your business is at higher risk of an IRS audit.
  • Confusing taxes: It can be difficult to assess taxes accurately when you pay your staff with cash.
  • Potentially inaccurate amounts: It can be challenging to have the correct amount of cash readily on hand when needed.
  • Cash flow issues: When you’re expected to have cash on hand for payroll, it could negatively affect your cash flow. 

Setting up a cash payment system

To set up cash payments, you’ll need a sound bookkeeping system in place. Plus, you’ll need to withdraw ample cash from the bank so that you can pay all your employees in full on payday. Finally, you’ll need to keep impeccable records to avoid an IRS audit.



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